Overview

Due to the importance of Makkah and Medina in the Muslim world, and the millions of pilgrims they attract, the two holy cities form a major component of Saudi Arabia’s non-oil economy. The pilgrimages of Hajj and Umrah are performed each year, with worshippers’ fees, food, transport and accommodation totalling some $12bn in revenues.

Makkah is home to the Masjid Al Haram, known as the Grand Mosque, which houses the Kaaba – Islam’s holiest site – and is also the birthplace of the Prophet Muhammad. Medina, meanwhile, is home to the Masjid an-Nabawi, or the Prophet’s Mosque, another important place of pilgrimage for worshippers during the Hajj and Umrah.

Medina lies directly to the north of the Makkah region and is roughly the same size with an area of 152,000 sq km. Both regions have witnessed considerable population growth over the last 15 years, in line with expansion that has taken place across Saudi Arabia. Makkah, in particular, has seen rapid growth and is today the most populous region in the country, with an estimated population of roughly 8.5m people, up from around 5.8m in 2004. Medina, whose population density is four times smaller than that of Makkah’s, has an estimated population of 2.1m, up from 1.5m in 2004.

Widening Appeal As A Destination

Makkah and Medina are set to play an important role in Vision 2030, the Kingdom’s long-term development plan being spearheaded by Crown Prince Mohammed bin Salman bin Abdulaziz Al Saud, and which aims to re-orientate the Saudi economy away from its dependence on oil revenues. With religious tourism such a vital source of non-oil revenue, much of the development in and around Makkah and Medina over the coming years is directly linked to the goals laid out in Vision 2030, which include plans to significantly boost pilgrim numbers as well as increase the country’s appeal as a wider tourist destination.

The millions of pilgrims who travel to Makkah and Medina each year form a mainstay of both the regional and national economy, with the Hajj and Umrah together contributing 20% of the Kingdom’s non-oil GDP and 7% of total GDP. While initiatives are currently under way to increase the number of non-religious visitors, pilgrims are expected to continue underpinning growth in the country’s wider tourism sector, with Vision 2030 targeting 30m Umrah visitors alone by 2030.

The Hajj, which in 2017 took place between August 30 and September 4, is one of the five pillars of Islam and its practice is obligatory for all Muslims at least once in their lifetime provided they are physically and financially able. The five-day pilgrimage involves a series of rituals, the most important being the circling of the Kaaba in the Grand Mosque.

Visitor Numbers On The Up

In 2017, 2.35m worshippers took part in the Hajj, a significant increase on the 10-year low of 1.86m recorded in 2016. Of those that took part in the Hajj in 2017, 1.75m came from outside Saudi Arabia, up from the 1.32m who came from outside the Kingdom in 2016.

The rise in numbers is due to the easing of a strict quota system that had been put in place in recent years. The quota system determines who is allowed to make the Hajj pilgrimage, as set out by the Saudi government. However, how the quota is filled is decided by the country of the citizen that wants to make the pilgrimage. The system had restricted the overall number of visas for Muslim countries by as much as 20%, but the quota was increased in 2017 for the first time in five years to support expansion works on the Grand Mosque.

The number of Hajj pilgrims has fluctuated in recent years, with a high of more than 3m recorded in 2012 before the introduction of the quota restrictions. While 2017 marked the first easing of the quotas, the government is expected to lower restrictions further and accommodate more worshippers as the ongoing expansions to the Grand Mosque near completion. According to Osama Al Bar, the mayor of Makkah, the local government has set a target of receiving 3.75m Hajj pilgrims by 2020, and 6.7m by 2030.

Umrah Visas

Meanwhile, the Umrah pilgrimage can be undertaken at any time of year, and though not an obligatory pillar of the Islamic faith, it is still performed by millions of pilgrims each year.

In 2016, 7.5m pilgrims performed the Umrah, while as of June 2017 a total of 6.75m Umrah visas were issued to pilgrims, according to a report from the Ministry of Hajj and Umrah, up from 6.39m for the same period in 2016. The government is now seeking to significantly expand the number of Umrah pilgrims who visit the Kingdom each year in line with the Vision 2030 target of 15m visitors by 2020 and 30m by 2030. This rise in numbers will be underpinned by the expansion works taking place at Makkah and Medina, and also by the notable infrastructure upgrades that are due to come online early in 2018, namely the Haramain High-Speed Rail and the new terminal at Jeddah’s King Abdulaziz International Airport (KAIA).

The government has also been working to increase revenues associated with visits by pilgrim, and in 2016 introduced visa fees for the first time. Under the new system, first-time pilgrims are exempt, but subsequent visits will incur a fee of $533.20. The new system is expected to earn the Kingdom millions of riyals in revenues, and local players are confident the new charges will not deter repeat-religious visitors. In addition, the government is considering the introduction of cheaper short-term visas costing $133.30 and valid for five days.

The new system also includes the Umrah Plus visas, which afford pilgrims the opportunity to visit other, non-religious historical sites across the Kingdom, rather than the standard pilgrim visas which allow entry only to Makkah and Medina. Such efforts to combine religious tourism with general tourism fall directly in line with the broader push to elevate the sector’s role in the economy.

Expanding Outwards

Over the past several decades various expansions have been made to the Grand Mosque in Makkah, with new minarets, a large outdoor prayer area, an expanded internal prayer hall, air conditioning, heat-resistant floors and a modern drainage system all added to the complex.

The growing global Muslim population over the past 50 years, coupled with the advent of low-cost air travel, has resulted in numerous renovation and expansion projects being undertaken to serve rising pilgrim numbers. In 2015 the government announced the beginning of the third phase of the current expansion project. However, after a crane accident that same year killed 107 worshippers performing their Friday prayers, the project was halted and then remained on hold due to budgetary constraints caused by the fall in oil prices. After a record budget deficit of $98bn in 2015, the government was forced to reduce state spending by more than half, including on major infrastructure.

Given the rise in oil prices in 2017, the government is on course to reach its end-of-year budget deficit projection of $52.8bn, down from $79.18bn in 2016, with the result that many stalled construction projects have resumed. Indeed, the government announced in September 2017 that it would be restarting the Grand Mosque expansion in Makkah following the 2017 Hajj, with Saudi Binladin Group, a multinational construction conglomerate headquartered in Jeddah, resuming the $26.6bn construction project. Saudi Binladin Group, which was temporarily banned from winning new state contracts following the crane accident, is also due to restart work on the Abraj Kudai hotel complex in Makkah in the coming months.

Once expansions are complete in 2020, the Grand Mosque will be able to accommodate 2.2m worshippers, more than three times the previous capacity of 600,000. This is thanks to the addition of 1.47m sq metres to the Grand Mosque’s current size of 356,000 sq metres. Alongside this enlarged area, known as the King Abdullah Expansion Structure, courtyards, tunnels and a ring road are being built.

In addition, 78 ground-floor gates will surround the expansion building, while 680 escalators, 21,000 toilets and six new floors for praying will be created. Al Bar told local media in 2016 that up to 400,000 people per hour will be able to circumambulate the sacred Kaaba, while the Jamarat bridge – where pilgrims throw stones at pillars symbolising the devil – will handle up to 500,000 pilgrims at a time.

Alongside this, expansion to the Prophet’s Mosque in Medina is set to enlarge its capacity from 1m worshippers currently to 1.6m when complete. Construction on the site was originally delayed as the expansion first required the demolition of 10 nearby hotels, as well as several residential and utilities buildings in the area. As of early 2018, no information was available on the expansion’s end date.

Population Growth & Housing Pressure

undefined Expansion to mosques and infrastructure in the two holy cities is running concurrently with efforts to build up residential supply. The Saudi Arabian population has grown rapidly since the 1960s, with the urbanisation that has accompanied this growth posing various logistical challenges to the country’s policy makers. Makkah and Medina, where the local authorities are presented with the twin challenges of providing infrastructure and services both for the quickly growing local population and for the annual influx of religious visitors, have been no exception in this regard. Affordable housing, in particular, is an area of concern for the government, with many local residents finding themselves priced out of the market in recent years as a result of developments associated with meeting the needs of pilgrims.

The area surrounding the Grand Mosque in Makkah, known as Markazia, has seen its residential capacity reduced as the neighbourhood is redeveloped to make way for hospitality and commercial spaces, with a 2017 JLL report warning that although the developments offer many opportunities in the hospitality and retail sectors, the housing shortage has been exacerbated by pilgrim-focused construction projects. In its report, JLL highlighted the discrepancy that now exists between property prices in Markazia and the rest of Makkah, with Markazia properties selling for at least four times the value of those in other parts of the city.

Housing Solutions & Goals

The challenge for the authorities therefore lies in finding a balance between the need for development projects that bolster pilgrim capacity and providing city residents with adequate housing. Indeed, the National Transformation Programme (NTP) 2020 – a near-term component of Vision 2030 – has singled out the issue of affordable housing, targeting to increase home ownership from 47% to 52% by 2020.

In addition to this, the NTP has called for “appropriate solutions to utilise unused or non-productive government-owned land ... to help the Ministry of Housing develop and provide affordable housing units”. While currently just 10% of residential units are developed by approved real estate developers, the NTP has set the target of raising this to 30% by 2020, of which half is to be made available to those eligible for affordable housing. This goal is in line with the longer-term 2030 aim of “enabling citizens to obtain suitable residence” across the country.

One major project in the pipeline directly aimed at tackling housing shortages in Makkah is the enormous Al Faisaliah development taking place in the western part of the city. When complete it will cover almost 2.5 sq km and be able to accommodate 6.5m people in almost 1m housing units (see analysis).

Real Estate

While population and housing pressures are a concern for the authorities, the wider real estate sectors in the holy cities continue to flourish, with Makkah and Medina home to some of the most expensive real estate in the world. Data released by CBRE, a global investment firm, for example, suggests that premium Makkah housing is around five times higher in value than that of Jeddah’s. Indeed, the average premium residential property in Makkah is valued at $29,326 per sq metre compared to $5865 per sq metre in Jeddah.

Meanwhile, the government’s 2017 announcement that it would be easing quota restrictions on Hajj pilgrims boosted the property market in Makkah, with a 12% increase in residential transactions recorded in the first half of 2017 compared to the same period in 2016. In addition, JLL noted that due to the easing of restrictions, as well as a drop in land prices, Makkah was the only major city in the Kingdom to have witnessed such a significant increase in sales activity.

Hospitality

The hospitality sector also continues to post strong growth rates in Makkah and Medina, with international operators eyeing up opportunities in the high-end segment. According to Jamil Ghaznawi, national director and country head of JLL Saudi Arabia, “Increasing religious tourism in line with Vision 2030 will create huge opportunities in the retail, hotel and broader accommodation sector in Makkah. The long-term prospects for the hotel sector are extremely positive given the reliance on accommodation providers to support the global demand of religious pilgrims in Makkah.”

He also pointed out that the key to capitalising on growth of the real estate market will be strong cooperation between the public and private sectors. Elsewhere, CBRE has forecast that from 2017 to 2022 a total of 35,000 hotel rooms are expected to come on-line in Makkah, an increase of almost 80% on the 45,000 rooms available today. According to CBRE, a significant number of the rooms will be located in the premium segment, with five-star hotels expected to constitute almost 60% of total supply, up from 44% today.

Of the new international hotel openings, the five-star Hilton Makkah Convention Hotel led the way in 2017. The majority of the hotel’s 764 rooms and suites offer views of the Grand Mosque, and the hotel is home to business facilities including the convention centre and ballroom which can accommodate up to 1600 guests.

According to the hotel’s general manager, Mark Allaf, the hotel is trying to change the image of Makkah. “Makkah has always been known as a religious destination. Now, we’re trying to introduce the concept of combining both the performance of Umrah and Hajj, and specifically Umrah, with a business event,” he told local press in May 2017.

Alongside Hilton, AccorHotels and Carlson Rezidor Hotel Group have opened up in Makkah, bringing much-needed budget and mid-range alternatives to cater to the growing need for non-luxury hotels in the city. AccorHotels is the largest hotel operator in the Kingdom, with its Ibis Styles hotel in Makkah offering 286 budget rooms. In the coming years the company aims to double this number to more than 25,000 rooms across the Middle East.

Infrastructure Expansion

As Makkah and Medina gear up to host significantly larger numbers of tourists in the years ahead, infrastructure capacity in and around the holy cities is being upgraded to cope with the projected accompanying rise in traffic. Indeed, the success of Vision 2030’s plans and ambition to increase visitor numbers depends as much on expanded hospitality capacity as it does on boosting transport links.

The $16.5bn Haramain High-Speed Rail, which will link Makkah and Medina via Jeddah and Jeddah’s KAIA, is due to open in March 2018 and will go a long way in supporting the ambitious targets laid out in Vision 2030. Of the total number of international pilgrims travelling to Makkah, 96% arrive through KAIA, and the opening of a rail line – with an initial daily capacity of 240,000 passengers – directly linking the airport to Makkah in 30 minutes will significantly ease the strain on the overburdened Makkah-Jeddah highway, which until now has served as the only transportation link between the two holy cities. Travel time between the cities themselves should be reduced to less than two hours, and the railway is expected to transport approximately 60m passengers annually once it becomes fully operational.

Meanwhile, a $7.2bn expansion to KAIA in Jeddah is expected to be completed next year, and will boost the airport’s existing capacity from 30m to 80m passengers per annum by 2035. Alongside this, construction on a smaller airport in Taif – a city situated east of Makkah – has begun, with a completion date set for 2020. The airport is designed to serve 5m pilgrims travelling to and from Makkah each year, and according to Prince Khalid bin Faisal Al Saud, governor of Makkah, it will be the first landmark project of Vision 2030 to be completed in Makkah.

A new Makkah metro is also planned as part of the $16.5bn Makkah Public Transport Programme. The first phase of the project is expected to be completed by 2020, and will include two lines connecting 22 stations, while the whole project will include a further four lines connecting 88 stations in total.

Meanwhile, plans continue for the Medina Public Transport Programme, with a 12-month contract awarded to a French-based consortium of Egis and Systra in 2015 to carry out a preliminary design for the planned three-line metro system. The project is due to be completed by 2020.

Outlook

With a significant rise in the number of incoming religious visitors envisioned as part of Saudi Arabia’s Vision 2030, the two holy cities of Makkah and Medina are set to be the focus of significant investment in the years ahead. This will come in the form of both real estate developments in the hospitality, retail and residential segments, and also from the significant infrastructure upgrades due to come online in the coming months and years. Meanwhile, government efforts to grow the wider, non-religious tourism segment bodes well for an industry that has traditionally been subject to significant seasonal fluctuations, with initiatives such as Umrah Plus, for example, set to distribute the benefits of religious tourism more equally both throughout the year and across the Kingdom.

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